“MANAGING THE MANAGED”
CHANGING LIABILITIES WITHIN
THE HEALTH CARE SYSTEM
PAST - Fee for Service Arrangement
Patient
Physician/Hospital
Fee-for-service Insurer
PRESENT - Managed Care Arrangement
Patient
Managed Care Insurer
Utilization Review
Capitation
Profit Sharing
Per Diem
Physician/Hospital
FUTURE - Integrated Health System Arrangement
Patient
Physician
Insurer
Hospital
Managed Care Organizations
•
•
•
•
•
Staff Model HMO
Group Model HMO
Preferred Provider Organization (PPO)
Physician Hospital Organization (PHO)
Independent Physician Association (IPA)
Managed Care
Organizations (Continued)
•
•
•
•
Management Services Organization (MSO)
Provider Sponsored Organization (PSO)
Utilization Review Organization (URO)
Credentialing Verification Organization
(CVO)
• Physician Practice Management (PPM)
Damages Types
• Bodily injury (BI)
• Economic
Applicable Liability Policies
•
•
•
•
Errors & Omissions (E&O)
Medical Malpractice
Directors & Officers (D&O)
Blended or Integrated Products
Typical Managed Care
E&O Exposures
•
•
•
•
•
•
•
Negligent utilization review
Vicarious liability
Negligent credentialing
Provider exclusion
Antitrust
Adverse financial incentives
Provider contracting
Typical Managed Care
E&O Exposures (Continued)
•
•
•
•
•
•
•
Breach of fiduciary obligations
Breach of contract, warranty, or guarantee
Bad faith claim denial
Misrepresentation
Trademark/slogan infringement
Advertising/marketing claims
Medical malpractice
Typical Managed Care
D&O Exposures
• Anticompetitive acts (claims by government
or regulators, competitors, or providers)
– Price fixing
– Monopolization
– Unfair competition
• Mergers and acquisitions
Typical Managed Care
D&O Exposures (Continued)
• Mismanagement
–
–
–
–
Waste or neglect of assets
Failure to manage properly/nonsupervision
Improper delegation of authority
Breach of duty or loyalty
• Securities actions
• Fraud; abuse; dishonesty
• Employment practices
Typical Managed Care
Medical Malpractice Exposures
•
•
•
•
Direct provision of care - Staff Model HMO
Nurse call lines
Demand management
Negligent denial of care
(Texas law, SB 386)
Managed Care - Changing
Exposure Landscape
• Expanding fiduciary liability
– Shea v. Esensten, 107 F.3d 625 (8th Cir, 1997),
cert. den. 118 S. Ct. 297 (1997)
• HMO that administered an employer’s benefit plan had a
fiduciary obligation to disclose its financial incentive structure
that may impact care provided to enrollees.
– Herdrich v. Pelgram, 154 F.3d 362 (7th Cir, 1998)
• A managed care plan’s incentive program which paid
employee physician executives year-end bonuses for meeting
utilization targets may constitute a breach of fiduciary duty
under ERISA when such physicians make decisions about a
patient’s care.
Managed Care - Changing
Exposure Landscape (Continued)
• More direct medical malpractice exposure
– Shannon v. McNulty, 718 A.2d 828 (3rd Cir, 1998)
• Advice provided by nurses constituted medical advice and
therefore the employer HMO could be found liable for medical
malpractice if further proceedings prove the advice given
deviated from the standard of care.
• State laws, like Texas and Missouri.
Managed Care - Changing
Exposure Landscape (Continued)
• Punitive damages
– Goodrich v. Aetna, No. RCV 020499, January, 1999
• California jury awarded widow and children $116 million in
punitive damages and $4.5 million in compensatory damages
finding that an HMO acted with malice, oppression, and fraud in
handling her husband’s treatment requests.
– Johnson v. Humana Health Plan, Inc., No. 96-CI00462, KY. Cir., 1999
• A jury awarded more than $13 million in punitive damages to a
woman who was allegedly denied coverage for a hysterectomy
her doctor said would have cured her of her cervical cancer.
Managed Care - Changing
Exposure Landscape (Continued)
• Erosion of ERISA
– Pappas v. Asbel, 1998 WL 892074 (PA S. Ct.,
1998)
• Tort claims against HMOs under state law are not
pre-empted by ERISA.
ERISA
• ERISA supersedes state laws that relate to
employee benefit plans
– HMO’s successfully argue cause of action is not
medical malpractice, but a claim related to an
ERISA plan
• ERISA protection is eroding
– Federal legislation proposals
– State court decisions
Managed Care E&O
Percentage of Claim Counts
Vicarious
Liability
Credentialing
17%
13%
Other
Utilization
Review
37%
33%
Man aged Care D&O
P ercentage of C laim C ounts
Utilization
Review
15%
V icarious
Liability
C redentialing
3%
11%
E mployment
Other
35%
36%
“MANAGING THE MANAGED”
CHANGING LIABILITIES WITHIN
THE HEALTH CARE SYSTEM
Exposures and Ratemaking
Policies Exposed
Medical Malpractice
Bodily Injury
E&O
D&O
Economic
Policy Interaction
Why does Type of Policy Exposed Matter?
• Policy types tend to have different
deductibles / limits
• Policies may be provided by different
insurers
• Policies may have different reinsurers
• Policies may have different ALAE limits
and duty to defend (ALAE may be More
Significant than Indemnity)
Typical Policy ALAE Coverage
Medical Malpractice
• ALAE Outside the Limit
• Duty to Defend
E&O
• ALAE Included in the Limit
• Duty to Defend
D&O
• ALAE Included in the Limit
• No Duty to Defend
Policy Interaction
• Liability may Tend towards Policy with
Greatest Coverage
• Quality of Healthcare Provider’s
Underlying Medical Malpractice Coverage
affects Potential MCO E&O Exposure
• Depends on Relationship Between MCO
and Healthcare Provider
MCO/Provider Integration
Spectrum
Low
High
Facilitator
Provider
IPA
NetworkModel HMO
StaffModel HMO
• MCO’s Position on Spectrum Depends on
Program Design
Managed Care Liability
Ratemaking
• Coverage Generally Offered by Traditional
Medical Malpractice or D&O Writers
• Insurers use Their Own Ratemaking
Expertise/Data Combined with Judgment
– e.g., A Medical Malpractice Writer may Develop a
Rate that is a Multiple of the Medical Malpractice
Rate
• Wide Range of Rates on the Market
MCO E&O Exposure Bases
• Per Member Per Month
– Reflects Size of Insured Population
– Does Not Work for MCO’s that Handle a Portion of
a Covered Population (e.g., IPA)
– Does Not Consider Physician Specialty of Case
Mix
– Does Not Reflect Economic Damages Exposure
MCO E&O Exposure Bases
• Gross Revenue
– Reflects Economic Damages Exposure
– Does not Reflect Bodily Injury Exposure
– Does not Reflect Territorial Variations
• Medical Malpractice Premium
– Reflects Bodily Injury Exposure
– Reflects Territorial Variations
– Does not Reflect Economic Damages Exposure
Suggested Exposure Bases
Separate Medical Malpractice Policy or No
Bodily Injury Exposure (e.g., Staff Model
HMO or TPA):
Economic Damages: Gross Revenue
Bodily Injury: N/A
Suggested Exposure Bases
No Separate Medical Malpractice Policy
and All Member Services (e.g., Network
Model HMO or PPO):
Economic Damages: Per Member Per Month
Bodily Injury: Medical Malpractice Premium
Suggested Exposure Bases
No Separate Medical Malpractice Policy
and a Portion of Member Services (e.g.,
IPA):
Economic Damages: Per Provider
Bodily Injury: Medical Malpractice Premium
Ratemaking Procedure
• Judgmental Determination of MCO/
Provider Integration
• Pure Premium Approach
• Contingency Load
• Consideration of State ERISA Laws
• Consideration of Punitive Damages
Pure Premium Approach
• Select Appropriate Exposure Bases
• Data Sources:
– Company Medical Malpractice Data and D&O data
– Industry Medical Malpractice Data and D&O data
– Jury Verdict Research Data
Contingency Load
• Actuarial Standard of Practice No. 30 Treatment of Profit and Contingency
Provisions and the Cost of Capital in
Property/Casualty Insurance Ratemaking
– Section 3.7: “...include a contingency provision if
the assumptions used in the ratemaking process
produce cost estimates that are not expected to
equal average actual costs.”
Contingency Load
• Costs are Likely to be Higher than
Historical Averages:
– “Patients Bill of Rights” Passed with Bipartisan
Support in House and Senate - Allows Consumers
the Right to Sue
– Supreme Court Rulings Since 1995 Have
Expanded States Ability to Regulate Healthcare Increasing Litigation and Legislation
Contingency Load
• Costs are Likely to be Higher than
Historical Averages (Cont.):
– Recent Lawsuits Seeking “Class-Action” Status
(Tobacco Plaintiff Attorneys - Awarded ~ $10B in
Fees - are now Pursuing MCO’s)
• Blacklisting Physicians or Groups
• Retaliation Against Physicians who put Patients
First
• Violate State Anti-Trust Laws
• Violate RICO (Racketeer Influenced, and Corrupt
Organization) Act
Contingency Load
• Costs are Likely to be Higher than
Historical Averages (Cont.):
– Recent Laws in California and Other States
Increase Patients Ability to Sue - Supreme Court
Decision in Illinois Allows Patients Right to Sue
– Public Opinion
Punitive Damages
• Treatment of Punitive Damages in State
where Rates Apply
• MCO’s Public Image May Lead to More
Severe Punitive Damages Awards
• Key Punitive Damages Exposure:
– Denial of Benefits
– Failure to Refer
Punitive Damages
Component - Example
• JVR Medical Malpractice Data:
–
–
–
–
a.
b.
c.
d.
Median Award:
Awards with Punitive Damages:
State Recovery %:
Partial Severity: (a)x(b)x(c)
$600,000
2%
30%
$3,600
Rate Calculation Example
• PPO - A Large Organization, Uniquely Rated
• Underwriter has Determined through
Conversations with the Insured that the
Organization is in the Middle of the Economic
Integration Spectrum
• Assume no ERISA Exemption
• Assume Punitive Damages are Insurable
Rate Calculation Example
Premium =
[(Economic Damages Rate) x (# of Members)] +
[(Bodily Injury %) x (Med Mal Premium)]
• Economic Damages Components
–
–
–
–
Pure Premium Based on Company or Industry Data
Judgmental Contingency Load
Punitive Damages Load
Other Profit and Expense Loads
Rate Calculation Example
Premium =
[(Economic Damages Rate) x (# of Members)] +
[(Bodily Injury %) x (Med Mal Premium)]
• Bodily Injury Component
– Based on Degree of Economic Integration, and
Other Plan Parameters
– Medical Malpractice Premium Determined through
Existing Rate Manuals
– Punitive Damages Load
– Other Profit and Expense Loads